Last week, Financial Times reported that Facebook was entering financial services. Facebook is reportedly on track to receive regulatory approval to be an ‘e-money’ institution in Ireland (by extension, Europe through a process called “passporting”). The social network is also looking at remittances, having talked to several remittance startups. “Facebook wants to become a utility in the developing world, and remittances are a gateway drug to financial inclusion,” a person familiar with the company’s strategy was quoted.
“Gateway” brought to mind an interesting discussion I had with a VC focused on startups in South East Asia. Our discussion was centered around Bitcoin and about how there is no compelling reason for people to use Bitcoin over cash. The same argument could be made for electronic money in general. Many developing countries are cash-based economies. Workers receive their paychecks in cash; majority of merchants accept cash, even online retailers (i.e. cash on delivery). Unlike those in developed countries who have access to online banking or credit cards, converting cash into a digital form is an additional step that is difficult to justify without a strong use case (i.e. why bother converting when everyone accepts cash). This results in a chicken-and-egg problem: since no one is willing to convert cash into digital form, there is no incentive for people to accept electronic payments. With nothing to sustain a system of electronic money, the vicious cycle continues. However, there could be an input to the system that is already be inherently digital — remittances.
Remittances would provide an input into the digital money system, solving half the problem by removing the barrier of users having to convert cash to a digital form. The second half of the problem would be in the ‘use case’ (e.g. what can I do with the digital money I have received). This component would be critical in sustaining the system of digital money. Without a strong use case for digital money, there would be a leakage in the system as users convert the remitted digital money into cash. The ‘use case’ component can take many forms to sustain the system of electronic money: an e-commerce platform, a mobile POS system for merchants, or a network of people who already have mobile wallets to send digital money to.
That last use case is one where Facebook has already got covered through its core product and its recent acquisition of WhatsApp, where it has has gained more traction than Facebook in developing countries such as Brazil, Mexico, India, and Indonesia. The logical next step for Facebook to strengthen its ‘utility in the developing world’ would be to build or acquire some sort of mobile e-commerce solution (e.g. e-commerce platform, mobile POS) in developing regions for recipients to spend their ‘Facebook e-money’ on. That would effectively close the loop in the digital money system, allowing Facebook to dominate mobile payments in developing countries (or the developed countries of tomorrow).
Facebook is primarily an advertising company. The treasure trove of data on payment habits could help Facebook offer more targeted ads. Owning the payments and e-commerce platform would allow Facebook to provide valuable advertising ROI data that marketers seek. Facebook already monetizes personal data to subsidize the cost of running a social network. Could they do the same with transaction data to provide remittance and payments with zero transaction fees in the future? Watch out, Bitcoin.
It sounds like an absurd vision, until you realize that this is the same company that wants to put drones in the air to provide third-world countries with Internet access. It is not an an impossible feat, given the success of mobile payments in Kenya (M-PESA) and WeChat’s e-commerce and payments functionality. It will be very difficult though, considering the unique challenges of operating a FinTech company (e.g. regulation). Given Facebook’s resources and its network effects however, the social network may be uniquely positioned to disrupt an industry that has traditionally been slow to change, and crack a space that even Google has failed in.